"What is arbitrage trading in crypto?"
The following thread is not financial advice.
#JeremyAnswers
It's a relatively low-risk trade where you buy a token in one place and immediately sell it somewhere else for a small profit.
The profit you make from this kind of trade comes from the price discrepancy between the place you bought the token and where you sold it.
A simple example would be:
- A CEX (Centralised Exchange) sells ETH for USD$1000
- A DEX (Decentralised Exchange) swaps 1 ETH for 1005 USDT
- You buy the ETH off the CEX and sell it on the DEX for a 5 USDT profit
Don't forget about the fees.
In the example above (3), you will have to pay the following fees:
- Buying the token on CEX
- Withdrawing the token off CEX
- Selling the token on DEX
These fees eat away at your profits and could reduce your margin to 0.
An example of an arbitrage trade that is highly relevant today involves UST.
UST is an algorithmic stable coin that has a mechanic which improves stability by incentivising arbitrage when it de-pegs from USD.
Not sure what UST is? 👇
twitter.com/JeremySik/status/1524212693816602624?s=20&t=2wj21UxSn2MpdSsyGVjPwQ
UST's stability mechanic allows 1 UST to be swapped for $1 worth of LUNA no matter what UST's price is:
- Buy UST when it's less than $1
- Swap UST for LUNA at a rate of $1
- Sell LUNA
If you buy UST at 80c, your profit will be 20c on the dollar (minus fees).
Btw, if you're wondering how to take advantage of UST de-pegging by performing an arbitrage trade, don't bother. The mechanic I mentioned above has been broken since UST de-pegged.
For more details 👇
isitlegit.substack.com/p/the-ust-de-peg?r=18n6pb&s=w&utm_campaign=post&utm_medium=web
Arbitrage trading for the retail investor is tricky for a few reasons 👇
You need to sell ASAP after you buy.
If you take to long to make your trades, the price gap will close and you will lose out.
Moving tokens around takes time. In some cases platforms may even suspend transfers (e.g. Binance right now).
You need to trade large volumes to make good gains.
This is because the profit margins on arbitrage trades are usually small.
You're competing against bots.
They can analyse faster than you, make trades faster than you and have WAY more stamina than you do.
If you want more detail on arbitrage trading, CoinDesk has a decent article here 👇
coindesk.com/learn/crypto-arbitrage-trading-how-to-make-low-risk-gains/